Two events recently occurred that have me thinking about home prices at more distant points in the future than the activity I typically see out 1-2 years. They also led me to revisit one of the most frequent pushbacks I hear on use of CME home price contracts -the Case Shiller index.
First, with the expiration of the Nov 2023 contract on Nov 28th, the CME opened trading in the Feb 2029 expirations. Users can now express a view on home prices (adding, reducing exposures, or speculating on) home price levels > five years from now. Not surprisingly there's been no quotes (other than mine) and no trading. In fact there's been no trades either in the Feb 2028 expirations, and only two lots of open interest exist for the Feb 2027's. My focus has been on Feb 2024-25 and I've only recently started populating outright, intercity and calendar spreads out to Feb 2026.
Note that I've modified this template (which is available for the ten regional markets) to include YOY% changes in the index (measuring Mid Feb 2024 market quotes vs index released Feb 2023, and then mid-market to mid-market quotes going forward). I've also added cumulative change to illustrate a point further below.
Since uncertainty increases as time lengthens, bid/ask spreads for users looking to outright buy/sell exposure are likely to be wide. (See quotes below). However I can see immediate relative-value applications that might result in some longer-dated activity. For example, one reader had been looking to buy the 10-city/ sell Miami index (via an intercity spread) on as long an expiration as possible, as a play on rising sea levels. (I'll detail this in a later blog, but am happy to discuss further, off-line. For now, note that HCI/MIAG29 is offered at -92 ~ implying even gains from spot to G29 on both indices).
Another user had the view that home prices move with inflation and "if" inflation was going to average 3% over the next five years, they might have interest in forward contracts offered below that level. Someone with such views much end up quoting Feb 2029 (G29) via calendar spreads.
Second, the results of the quarterly Pulsenomics survey on home prices^1 were released last week. In addition to changing the reference index from Zillow to FNMA, the survey also now picks up home price forecasts out through calendar year 2028. (Recall that the Case Shiller index released February 2029 references activity through Dec 2028, so the time frames of the survey and the CME February contracts overlap.
Of importance, note that both the mean and median of the Pulsenomics survey for 2028 are consistent with gains by year-end 2028 (vs year end 2022) of > 25% (with some pundits looking for gains >40%). Contrast this with the CME quotes above where the cumulative gains from year-end 2022 are 11.3% (to the mid-market value of 342.7.) Note (absent index differences) that I've often written about my belief that home price futures (today) clear at a discount to expectations -given the imbalance between those looking to (sell) hedge and those looking to add exposure. (One reason is that there are many ways to add exposure, but few ways to express a negative view). However, users might question whether the discount should be so large over five years AND/OR whether there's an opportunity for those who want to put money on their forecasts. (Note, while most of the quotes are mine, I have no axe, or strong views on where home prices will go. I just want to foster development of platforms that allow users to express such views).
While the above differences might also be explained away by an argument that there are differences in the indices, I'd encourage readers to pause and ask "how big are those differences over time". Sure indices like FNMA (and Freddie) include data points from higher quality mortgages, and conforming balances, and Case Shiller was very volatile (relative to FNMA/Freddie) during the Great Financial Crises, as Case Shiller had exposure to homes backed by subprime loans that FNMA/Freddie didn't. However since home prices bottomed in 2012, the differences have been much smaller.
The graph below shows the performance of five different indices since March 2013. (I've scaled each of the five indices to have a value of 1.00 to start). Note that they all move in the same direction (no surprise as they all measure many of the same individual home prices) and that each index picks up turns in the market in 2020-21 (Covid). Long exposure to any index would have resulted in very similar returns for this long positive move.
Note that the FNMA index (used in the Pulsenomics survey) has had the lowest performance relative to Freddie, Zillow, and two Case Shiller indices. To bang home the point, the index that 100+ researchers suggest is going to be up, on average ~25% (vs year-end 2022) has not risen as much as any of the other four indices. Those with bullish views should look at opportunities in the CME Case Shiller futures markets.
Now I know that the CS index is a moving average with a two-month delay, and that may cause the CS indices to lag movements in short run. However, I question whether such features are germane to a five-year horizon investment. There are few other ways that investors can express a leveraged, fungible, publicly priced, pure-play on home prices.
In effect, don't let the search for the perfect index, or the perfect contract, dissuade you from a contract that might be well beyond "good enough".
Again, my axe is not to suggest that any price outlook is more correct than any other. I'm just trying to encourage participation in, and development of, an existing platform that already allows users to add/reduce exposure (with the CME - a very well-capitalized counterparty) to home prices. Yes, there if very little liquidity in these contracts today (and risk of loss should anyone enter a position) but if each reader posted quotes in one of the 10-city index contracts, it would create more depth in the market, leading to more hedging opportunities. I have no direct equity in the success of this CME contract. My work has been more akin to creating a public good. Please consider joining me in this effort to build liquidity in a much-needed hedging tool.
Feel free to contact me if you'd like to hear more, express a view, or work an order.
Thanks,
John
^1 - I'm one of the contributors to the survey.